The 408(b)(2) regulation requires a number of disclosures, including two status disclosures. Those are: Whether the service provider is acting as an ERISA fiduciary; and whether the service provider is acting as an RIA.
Continue reading 408(b)(2) Disclosures and Referrals to Investment Managers
One of our concerns about disclosures by broker-dealers (and affiliated RIAs) is that they may not fully appreciate the concept of related parties under the 408(b)(2) regulation.
When a broker-dealer is a covered service provider and contracts with others to provide some of the services, the broker-dealer and those other parties are “related” for purposes of the regulation and its disclosure requirements. In those cases, the compensation of the related party (as opposed to the broker-dealer) must be disclosed if it is (1) transactional or (2) charged against the plan’s investments. In some cases, there may be other required disclosures.
As we get closer to the July 1, 2012 deadline for 408(b)(2) disclosures, more issues emerge concerning the adequacy of disclosures. Of particular concern is the requirement that the disclosures include both monetary and non-monetary compensation. For example, where a mutual fund family or insurance company subsidizes broker-dealer or RIA conferences for plan sponsors or advisers, there is at least an issue of whether those subsidies should be disclosed to the plan sponsor clients of those RIAs or broker-dealers. Another example is where a mutual fund complex or insurance company pays for advisers to attend conferences.
As you know, I have done a series of short articles about overlooked and misunderstood issues for 408(b)(2) compliance. This article continues that series.
In my last article, I discussed our concerns about the lack of awareness of discretionary investment managers concerning 408(b)(2) disclosures. This article addresses another one of our concerns . . . 408(b)(2) disclosures by advisers who refer investment managers and receive solicitor’s fees.
Covered service providers must make their 408(b)(2) disclosures by July 1, 2012—just weeks away. The failure to make those disclosures will cause their agreements with ERISA plans to become prohibited transactions, resulting in re-payments of compensation to the plans, taxes, interest and penalties.
Continue reading ERISA Disclosures for Discretionary Investment Managers
At first blush, it seems like 2012 is the year of plan disclosures and participant disclosures. The 408(b)(2) regulation is effective July 1, 2012, and the 404a-5 regulation follows two months later. However, there is more DOL activity than initially meets the eye.
There is an emerging issue under both the participant and plan disclosure rules concerning the information that must be provided for asset allocation models (AAMs).
It appears that some DOL officials are of the opinion that asset allocation models—at least under certain circumstances—are “designated investment alternatives” or DIAs. If AAMs are classified as DIAs, they are subject to disclosure requirements under both the plan and participant disclosure rules. As a practical matter, it may be impractical or even impossible for recordkeepers, broker-dealers and RIAs to provide that information.
The DOL recently issued its final regulation on conflicted investment advice to participants. Unfortunately, the scope of the regulation is not well understood. For example, if an adviser does not have any conflicts (that is, if the adviser cannot vary its revenue or that of any affiliates based on the recommended investments), then the adviser does not need to comply with the new regulation. For example, the adviser would not need to comply with the certification or audit requirements. However, if the adviser has financial conflicts of interest and can affect its own revenues (or those of an affiliate), then the adviser must comply with those requirements in order to give fiduciary investment advice to participants.
Together with other attorneys from my law firm, I have written a bulletin on the subject. If you are interested in having further information, please click on the linke below to see a copy of the bulletin:
Two other Drinker Biddle attorneys (Bruce Ashton and Joan Neri) and I just released a bulletin discussing what changes in the 408(b)(2) final regulation mean to registered investment advisers (RIAs). You can obtain a copy of the bulletin at:
http://www.drinkerbiddle.com/resources/publications/2012/the-final-408b2-regulation-impact-on-rias
While the final regulation clarifies a number of issues and grants an extension of time to comply, it also raises two issues which may come as a surprise to RIAs. The first is that asset allocation models (AAMs) may be treated as designated investment alternatives (DIAs), resulting in a number of disclosure requirements (both under 408(b)(2) and the participant disclosure regulation). The second is that the DOL has interpreted “indirect compensation” very broadly in a way that could require additional disclosures from RIAs. That would apply, for example, where investment providers (like mutual funds) or service providers (like independent recordkeepers or bundled providers) provide financial assistance to RIAs. Once specific example would be a conference put on by an RIA for its plan sponsor clients. Another example would be where an investment provider or a service provider offers “free” services to RIAs for their plan sponsor clients. Both of those issues, and others, are discussed in some detail in the bulletin.
